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News Release

Frankfurt

The rally continues - German commercial property investment market maintains its strong performance in the first half of the year


Press release including overview table [PDF]

Charts [PDF]
 

FRANKFURT, 5th July 2017 – Optimism on all fronts characterised the global and European financial situation in the last three months. New closing records on stock markets, an absence of inflationary or deflationary fears, expanding economies and, last but not least, a still extremely attractive monetary environment — all these factors have helped to spur on the financial markets. “An overall very positive prevailing mood has become established with little space for risk scenarios, even though a certain degree of underlying scepticism may still be rooted in the back of our minds,” said Timo Tschammler, CEO of JLL Germany.
 
In the eurozone, the election results in France and the Netherlands were certainly welcomed as a signal that the populist tide is turning. However, the recent bank crisis in Italy serves as a reminder that the situation in Europe remains fragile and volatile, and makes it very clear how quickly problem areas can flare up. “Investors would do well to factor in such risks, or act with the appropriate level of caution,” stressed Tschammler.
 
Until the financial concerns of some EU countries and some banks have been resolved, the European Central Bank will certainly guard against turning the screw on interest rates. The ECB may gradually reduce its bond repurchases and remain committed to its slow exit strategy, but the key interest rate should remain at zero at least until the end of 2018. This also means that interest rates on both sides of the Atlantic will continue on divergent paths, with the United States poised to make further (minor) interest rate moves in the medium term. Interestingly, an argument in favour of such a move is to be able to react to future macroeconomic problems by reducing rates again.
 
Since the capital markets are very sensitive to signals and statements from the ECB, they are already anticipating an exit from the zero interest rate policy. Slightly higher interest rates are likely on these fronts in the coming months and quarters, while yields for 10-year German government bonds could also increase from 0.25% at present to 1% within the next 12 months.

 
Transaction volume continues to grow – focus on portfolios
 
Meanwhile, the German investment market rally continues. The positive trend that was evident in the first three months of 2017 moved seamlessly into the second quarter. The transaction volume amounted to €13.2 billion, exceeding the already very good result from the first quarter. In the first six months as a whole, the investment volume stood at €25.8 billion (+47% compared to H1 2016). “This is almost a new record - only in the first half of 2007 has a higher result been achieved. Based on the level of demand alone, an even higher volume would certainly have been possible if an adequate supply of suitable products had been available,” said Timo Tschammler.
 
Tschammler added: “It is, in fact, a contradictory picture. On one hand, many investors complain about a lack of products, while on the other hand the market races from one record to the next. If, however, you bear in mind that it is generally the case with most transactions that a double-digit number of investors have also shown interest as well as the ultimate buyer but have gone away empty handed, this only serves to illustrate the pace of demand on the German investment market for commercial real estate. However, from a pure market perspective, it is to be welcomed if the foot is not placed too firmly on the accelerator as it shows that not all portfolio owners are under pressure to sell, that the banks are continuing to make very careful checks and are still questioning the sustainability of loans, and ultimately that investors themselves are imposing a certain amount of caution, and obviously have a certain liquidity buffer against short-term risks or an unexpectedly rapid hike in interest rates. Added to this is the fact that while current price levels mean many owners can realise increases in value, a sale often does not take place because the sellers are then not certain how they should reinvest the capital.”
 
The five largest transactions in the first half of the year were all portfolio transactions, with the sale of the German portion of 74 logistics properties by Blackstone to CIC for about €1.9 billion representing the largest deal. In general, portfolio transactions posted above average gains with a year-on-year increase of 92% to €9.4 billion. In addition to these billion-euro transactions, 15 transactions above €200 million apiece have been completed this year to date. These large transactions alone account for a combined 28% of the half-year result (€7.2 billion). In particular, institutional investors from the Asian region were more active on the market and placed a focus on size. In the recent quarter, buyers from Asia emerged as direct investors in no fewer than four transactions larger than €100 million: the sale of the Pullman Hotel in Munich to an investor from Singapore, Zalando-Zentrale in Berlin to a South Korean investor, the sale of the T8 in Frankfurt to a South-Korean investor and, as already mentioned above, the Logicor Platform from Blackstone to CIC from China.

 
In search of better returns: stronger growth momentum outside the Big 7
 
Looking at the first half of 2017 as a whole, the seven major investment strongholds accounted for around €12.4 billion on aggregate. This corresponds to an increase of 30% compared to the same period of the previous year. Although the large-volume transactions mostly took place in one of the Big 7 cities, growth in these locations was below average. On the other hand, markets outside the established centres demonstrated significantly stronger growth with a year-on-year increase of 66%. Around €13.4 billion was invested outside the Big 7. “This provides further confirmation of the emerging trend in the first quarter. Greater risks are clearly being taken, as shown primarily by an expansion of the geographical focus,” said Helge Scheunemann, Head of Research at JLL Germany. Scheunemann added: “However, this does not apply equally to all asset classes. To put it in a nutshell: offices and hotels are being acquired in the Big 7, which account for 69% and 63% of the German transaction volume in these two categories respectively, while investments in retail, care facilities and logistics properties are also taking place outside the Big 7, with shares of 82%, 83% and 66% respectively.”
 
In the recent quarter, Berlin reclaimed the top spot from Munich in the ranking of the Big 7. Around €3.1 billion was invested in the German capital in the first six months of the year - around €400 million more than in the Bavarian capital. Hamburg and Stuttgart were the only two cities to register a year-on-year reduction in transaction volumes during the first quarter, and this trend continued in the recent quarter. In Hamburg, the volume fell by 30%, while Stuttgart recorded a 27% decline. Large transactions were again absent in both cities.

 
Logistics overtakes retail for the first time
 
Office properties were, are and remain the investor’s darling. Around €10.2 billion was invested in this asset class (40%). Retail properties, which accounted for a share of only 19%, were no longer in second place: they lost their traditional position to logistics properties. Four of the five largest transactions in the first half of the year involved property (portfolios) used for logistics purposes, lifting the invested capital in this category to around €5.5 billion (22% share). “The background to this shift is that investors see better earnings potential from logistics properties, especially as retail rental growth has ended in many markets and they can no longer justify the high prices (low yields). This is also reflected in property financing. Banks have become more cautious with regard to retail property, while recent business figures from property financers show a higher volume of loans for logistics properties, hotels, retirement homes and care facilities,” said Timo Tschammler. Mixed-used properties with combinations of office and retail or office and housing account for around 8% of the transaction volume, with hotels accounting for 7%. The remaining 5% relates to development sites and special property (primarily care facilities and retirement homes).
 
 
No let up in pressure on logistic property yields
 
The second quarter brought no movement in prime yields in any asset class, with yields remaining at a very low level. Yields are also not expected to increase at least while rental price growth exists or can be expected, and while current interest rates preclude any real investment alternatives. The average prime yield for office properties in the seven strongholds remains at 3.47%. One burning question here was whether the yield in Berlin would break through the 3% barrier. This was not the case, although the office prime yield is expected to drop to 2.9% over the course of the year. Further slight yield compression is also expected in the other markets, so that the average prime yield on aggregate will be pushed down to 3.31% by the end of the year. Combined with the expected rental growth, capital growth in the double-digit range (12%) will also be achieved in 2017 as a whole for the third consecutive year.
 
“However, we expect to see even stronger yield compression for logistics property. The strong demand and expectation of more expensive deals that are currently being traded on the market will probably lead to a further strong decrease by around 40 basis points to an average of 4.5% by the end of 2017,” said Helge Scheunemann.